You get what you pay for. At least that seems to be the logic behind the rise in director’s pay over the past year.
As new, stringent corporate governance rules increase board member accountability, company officials seem more willing to shell out larger sums to compensate directors for taking on the added scrutiny.
The median total compensation for outside (non-employee) directors of U.S. boards rose eigth percentage points since last year—from 24 percent to 32 percent, reports The Conference Board. The research recorded a rise in all three major industry sectors covered in The Conference Board’s annual study of outside director pay, which is based on a survey of director compensation and board practices in 606 companies.
In the manufacturing sector, for example, median total compensation for outside directors totaled $69,620, up about 25 percent from $55,700 in 2002. The financial sector increased by 32 percent, from $41,450 to $55,000, while the service sector rose to $60,000 this year, up from $48,400 in 2002.
Note that total compensation includes all fees and retainers, annual, one-time or periodic grants of stock, restricted stock grants, and the value of option grants.
Median basic annual compensation, the mix of fees, retainers and committee pay, is up in all three industry sectors as well. Manufacturing increased from $39,000 to $45,000; financial services from $31,600 to $43,000; and service from $35,700 to $40,000. Officials at the Conference Board also pointed out that retainers for audit and compensation committee members—who will likely face especially harsh scrutiny under new Sarbanes-Oxley Act mandates—also increased over the last year.
PCAOB to Target Fraud
The new accounting industry watchdog has made fraud its top priority for its audits of the auditing firms. Audits are slated to begin in May.
In a speech before the American Institute of Certified Public Accountants (AICPA), Public Company Accounting Oversight Board (PCAOB) Chairman William McDonough said that inspectors will focus on whether auditors are uncovering fraud at public companies. This according to Dow Jones. In addition, the PCAOB will be taking a close look at compensation for audit partners and employees.
McDonough also reportedly confirmed that his Board completed their inspections of the four largest accounting firms—Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers—and is currently analyzing the results. However, the findings of the inspections won’t be publicly released or discussed—at least for the time being, said the wire service.
The PCAOB is required to inspect the largest accounting firms (the ones with more than 100 public clients) every year. That group is expected to comprise the Big Four, plus BDO Seidman, Grant Thorton and McGladrey & Pullen. Smaller firms will be examined once every three years. All together, the PCAOB anticipates examining about 200 audit firms each year.
PCAOB Registration and Inspections Director George Diacont said his group will also look at adequacy of documentation, evaluation of risks and compliance with professional accounting and auditing standards.
FASB Moves Closer to Convergence
The Financial Accounting Standards Board (FASB) is one step closer to international convergence of accounting standards.
The U.S. accounting standards setter issued four exposure drafts yesterday, and officials claim that the proposals will improve U.S. generally accepted accounting principles (GAAP), and move U.S. accounting guidance closer to existing international accounting standards.
The exposure drafts are a reflection of the progress that FASB and the International Accounting Standards Board (IASB) have made in their first phase of a joint short-term convergence project that was initiated in 2002. The convergence effort is part of a more comprehensive project to merge the respective accounting standards into a common set.
FASB executives also said the Boards are jointly working on several smaller projects focused on major accounting topics, and are developing a coordinated agenda for expanding the convergence effort to these new rules.
The exposure drafts propose amendments to current standards in the following areas:
- Voluntary changes in accounting policies. Such changes would be applied by retrospective application rather than by cumulative effect adjustment as currently mandated.
- Calculation of earnings per share. When applying the Treasury stock method for year-to-date diluted earnings per share (EPS), the number of incremental shares included in year-to-date diluted EPS would be computed using the average market price of common shares for the year-to-date period. Also, shares issued upon conversion of a mandatory convertible security would be included in the computation of basic EPS from the date that conversion becomes mandatory.
- Asset exchanges. These tranasactions would require a gain or loss to be recognized on the exchange of similar productive assets, based on the fair value of the exchange, unless the exchange lacks commercial substance.
- Inventory. Unusual (“abnormal”) amounts of idle capacity and spoilage costs would be excluded from the cost of inventory and expensed as incurred.
FASB is also scheduled to propose a standard on the classification of liabilities sometime in the near future. The comment period for the Exposure Drafts ends on April 13, 2004.
Jailed CFO Keeps His Job
If you thought Corporate America was quickly cleaning up accounting and governance problems, think again. A CFO, who was sent to jail for committing financial fraud at a prior employer, will keep his current job despite serving a prison sentence.
Jeffrey Conway is expected to report to a minimum-security prison in Florida within the next two months, after recently being sentenced to 13 months in federal prison for his role in the fraud scandal at Rent-Way Inc., reports NOLA.com, a Website affiliated with The Times-Picayune, the largest circulation daily newspaper in Louisiana.
Back in December 2000, Rent-Way executives asked Conway, then the company’s president and chief operating officer, to resign after an internal investigation turned up inflated earnings that led to a $65-million adjustment. Conway was the CFO of Rent-Way from February 1992 to September 1999.
Just a few months later, and despite the problems at Rent-Way, Conway landed the CFO job at New Orleans-based Ruth’s Chris Steakhouse. However, by July 2001, Conway switched to a consultant’s role after pleading guilty to one count of conspiracy for his part in misstating income and EPS information in Rent-Way’s 1999 and 2000 financial reports, said the Website. According to NOLA.com, executives with Ruth’s refused to discuss the situation, but in a statement confirmed that Conway continues to work as an “independent consultant.”
“In his capacity as CFO and an independent consultant on a case-by-case basis, Mr. Conway has exhibited unquestioned leadership, knowledge and integrity,” said the Ruth’s statement. “His vast wealth of industry experience and strong contributions are recognized as valuable assets to the (Ruth’s) management team. (Ruth’s) cannot comment on the current situation, but stands behind Mr. Conway and offers its support during this process.”
Keep in mind that Conway was barred by the Securities and Exchange Commission from serving as an officer or director of a publicly held company after the regulatory agency accused him of directing the scheme to under report expenses and overstate income in an effort to meet Rent-Way earnings targets. The SEC ban, however, does not apply to jobs with privately-owned companies such as Ruth’s.
Other Rent-Way executives who pleaded guilty included former controller and chief accounting officer Matthew J. Marini, and former senior vice president of operations Jeffrey K. Underwood.
In addition to the prison term, Conway was fined $20,000 and ordered to spend two years under supervised probation upon his release. Prosecutors said that Conway asked to serve his sentence in Florida, which is relatively close to his home and job, in part so that he can continue working for Ruth’s.
Conway could have received eight months in prison under federal sentencing guidelines, but U.S. Attorney Mary Beth Buchanan said a longer sentence was warranted because his actions set a course of events in motion that harmed Rent-Way’s reputation, victimized shareholders and investors, and hurt his wife and three daughters, according to a report from the Associated Press.
- Pfizer Inc. raised its quarterly dividend 13 percent and said it would buy up to $5 billion of its common stock.
- El Paso Corp., hurt from the Enron fallout, said it planned to sell as much as $3.9 billion in assets to reduce its debt by nearly one-third by the end of 2005.